China to free deposit rates within two years

China is very likely to ease its grip on bank deposit rates within one or two years, central bank governor Zhou Xiaochuan said on Tuesday.

Zhou made the remarks at a press conference on the sidelines of the annual session of the National People's Congress, China's top legislature.

As part of the financial reform, the country has taken incremental steps toward interest rate liberalization, including a move in July to scrap the floor limit for bank lending rates, and a guideline in December for piloting negotiable deposit certificates on the interbank market.

Zhou's comments came after a government work report said last week that the country is to establish a deposit insurance system this year, the last and most important step of interest rate liberalization.

While authorities are taking cautious steps, some emerging business models, such as Internet finance, are playing their role in pushing the process.

The recent craze with Internet finance came as investors pulled money from traditional banks, which offer a maximum 3.3 percent interest rate for one-year deposits, to move it to web-based money market funds like Yu'ebao, which offers a seven-day annualized yield of nearly 6 percent.

Acknowledging their role, Zhou believes as the market assumes a more important place in allocating resources with competition rising, their attractions would gradually ease.

Regarding the yuan's status in the global market, the governor said there is still a long way ahead to realize the yuan's internationalization, stressing the importance of creating conditions to facilitate the cross-border use of the yuan, among which opening up the capital account is key.

China will first carry out reform plans to facilitate yuan flows, as to promoting its cross-border use, "we don't pre-set the speed or tempo", Zhou said.

Currently, the yuan is convertible for trade purposes under the current account, while the capital account, which covers portfolio investment and borrowing, is still largely controlled by the state over concerns of abrupt capital flows moving in and out of the country.

According to global transaction services organization SWIFT, the RMB overtook the Swiss franc to become the seventh most-used currency for payments worldwide in January, with a 1.39-percent share in all global payments.

In comparison, the U.S. dollar accounted for 38.71 percent of all global payments.

China is the world's second-largest economy after the U.S., as well as the largest exporter. The international use of the RMB is not at all commensurate with the importance of China's economic status.